In a report released today, the rating agency said it expects property and casualty (P&C) insurers to enjoy continued growth in premium sales as GDP rises by 2% in the Euro area this year, and by 1.8% in 2019.

Gradually increasing interest rates should help investment returns, although life insurers that hold assets with a longer duration face continued pressures, notably in Germany.

Moody's also warned that mergers and acquisitions (M&A) could threaten the sector, reducing capital and creating execution risks for insurers, while continued changes in asset mix also present challenges.

“The profitability of the European insurance sector is increasingly pressured by non-insurers, such as asset managers in the life segment, or technology firms and reinsurers in the P&C segment,” Moody's senior vice president, Benjamin Serra, said.

“As a response, insurers alter their business model and pursue growth opportunities, which will drive an increase in M&A activity, with cross-sector M&A becoming more frequent.”

Moody's also expects European insurers to continue to increase their investments in illiquid assets and in lower quality assets.

This could create late-cycle risks at a time when non-financial corporate leverage is rising and debt covenants are weakening, the firm said.

Asset risk is therefore thought to be growing for European insurers, which are not all yet ready to deal with a deterioration in the credit quality of illiquid assets.

A hard Brexit and further deterioration in the credit quality of the Italian sovereign are the two key downside risks to Moody's stable outlook for the sector.

“A Brexit agreement is likely to be reached after fraught negotiations, but the risks of a 'no-deal' scenario are significant,” Moody's added.